People struggling to meet their payments on credit cards, loans, car finance or other forms of consumer credit are being offered payment holidays of up to six months. The new measures are an extension of the government's existing financial support package for those facing hardship because of the ongoing Covid-19 crisis, which were due to end on 31 October. As the nation enters another national lockdown, regulatory body the Financial Conduct Authority (FCA) has updated its guidance, now offering help that could stretch well into 2021.
What are the new rules on consumer credit payment holidays?
In much the same way as with the extension on mortgage payment holidays - for more on this read our article "Mortgage payment holiday extended - what you need to know" - the new guidance on consumer credit payment holidays is that those who are struggling to pay their monthly repayment can approach their lender to ask for a break from having to pay the debt. This applies to credit cards, personal loans, motor finance, rent-to-own, buy-now-pay-later and pawn broking.
Borrowers who have not previously taken a payment holiday because of the pandemic will be offered up to six months' break from paying back the money they owe. For those that are already on a payment holiday, they can request to extend this, up to a total of six months.
What about payment holidays on payday loans?
The FCA has issued updated temporary guidelines that those with short-term, high-cost loans - "payday loans" - can ask for a one-month payment break, although this is only available if they haven't already taken up a previous payment holiday earlier in the year.
Who is eligible for a payment holiday?
You will be able to apply for a payment holiday if:
- You are experiencing financial hardship as a direct result of the Covid-19 pandemic
- You haven't previously taken a payment holiday under the government's support scheme
- You are currently on a payment holiday but it has lasted less than six months (not applicable for payday loans)
Is it a good idea to take a payment holiday on my credit cards and loans?
The government has designed the consumer credit payment holiday scheme to offer support to those who are genuinely finding it difficult to make payments., allowing them help without it negatively affecting their credit rating. However, if you can afford to make your payments, you should do so. This is because:
- While you are provided with a break from paying the amount you borrowed, the interest on the payment will still accrue during the payment holiday. Your monthly repayments could increase at the end of the payment holiday.
- For people with borrowing at a high APR, the break could end up adding a considerable amount to the total that needs to be repaid, potentially leading to further difficulties in making payments in the future.
- At the end of the payment holiday you could end up paying off the debt over a longer period, with a higher level of interest.
That said, if you are struggling, it is far better to take an authorised payment holiday than to end up missing payments and falling behind, which would have a devastating effect on your credit record. Speak to your lender to work out the best course of action for your individual circumstances.
What are the alternatives to taking a payment holiday?
If you are worried about the impact of taking a payment holiday on your credit card, loan or other finance, consider:
- Asking you lender for more tailored support, perhaps reducing the minimum monthly payment to a more affordable level for a short period of time, allowing you to keep reducing the balance
- Transferring the balance of your existing debt to a credit card with an interest-free introductory period. Although you will require an excellent credit score to be eligible for this type of card, if you can make the move, you can be provided with up to 25 months interest free to help you sort out your finances
How can I apply for a payment holiday?
As lenders have been incredibly busy during the pandemic, most have put in place online applications for payment holidays. It is worth noting that the FCA is still in consultation with lenders about how to implement these latest changes, so borrowers will need to wait until the details are finalised.
What help can I get if I don't qualify for a payment holiday?
If you aren't eligible for a payment holiday, it is still worth speaking to your lender if you are having difficulties making the repayments. They have been encouraged by the government to continue to provide other forms of support to individuals and they may be able to provide another solution that can help.
For details of organisations that can offer free debt advice, read our article "Where to get free debt advice"
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